Huntington Bancshares Inc (HBAN) — Q3 2021 Earnings Call Transcript

Thank you, Luthania. Welcome, everyone and good morning. Copies of the slides we'll be reviewing can be found on the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A. As noted on Slide 2, today's discussion, including the Q&A portion will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this Slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings. Let me now turn it over to Steve.

Thanks Tim. Good morning, everyone. I'm very pleased with our third quarter, we delivered good core performance and made enormous progress with the TCF integration. Let me begin on Slide 3. Thanks to the hard work of our colleagues, we're on track to complete the TCF integration as planned, and deliver the resulting deal economics. This combination brings scale, density, new markets and new specialty businesses. At the core of Huntington, we are a purpose-driven company with a vision to build the leading people-first digitally powered bank in the nation. We remain focused on our core objectives to drive organic growth and deliver sustainable top quartile financial performance. On Slide 4, our third quarter performances included a full quarter benefit from TCF and record total revenue. We delivered good growth in fee income, excluding PPP, and improving credit metrics. Just over a week ago, we successfully completed the conversion of TCF to Huntington systems, and we now offer an integrated set of products, capabilities, and experiences to our customers. As a result of the great efforts of our colleagues, we were able to complete the conversion in just 10 months since the announcement of the transaction. We've completed most of the actions to drive our targeted cost synergies, and are on track to deliver all of the announced cost reductions. With the conversion behind us, we're now able to focus thousands of colleagues on new business development activities to close the year strong and carry that momentum into '22. We are investing in these revenue producing colleagues as well as new capabilities in the expanded markets. We're seeing substantial momentum in many of our initiatives, including targeted areas of deep revenue generation like wealth and capital markets, as well as cards and payments. Both consumer and commercial loan productions continue to be robust, and commercial pipelines are up over 30% from a year ago, and new production activity has nearly doubled. Additionally, we were pleased to be ranked number one nationally for the SBA 7(a) lending by volume, marking the fourth consecutive year we've been recognized in the past five. As the recovery continues, we will dynamically manage our overall expense base and look for ways to drive incremental efficiencies across the bank. We intend to self-fund the investment capacity necessary for strategic initiatives that will drive additional revenue growth in the years ahead. Our strategy is centered on supporting customers banking where and when they want and meeting them in their preferred channel. As part of that strategy, we are continually optimizing our distribution network; we will be consolidating 62 branches in the first quarter of '22 equal to 6% of the combined branch network. And these are in addition to the 180 branch closures announced as part of the TCF transaction. Importantly, we will continue to retain the number one share of branches in both Ohio and Michigan. In addition to branch consolidations, we are continuing to diligently optimize roles and resources within the bank. We're committed to delivering positive operating leverage as we did annually for a decade leading up to '21. Finally on the capital front, we accelerated our share repurchase in the quarter as well as announced an increase to the quarterly dividend. These actions demonstrate our confidence in the performance and outlook for Huntington as well as our commitment to our shareholders to actively manage our capital levels. Slide 5 provides an update on the TCF integration. When we announced the transaction, we saw strong potential for expense synergies, as we leverage the benefits of scale, but we also see additional organic growth. And today, I can say that we're even more excited about the revenue opportunities in front of us. The combination of new growth markets and increased density, the addition of more than one and a half million customers, and expanded specialty capabilities collectively set up our future revenue growth. Let me share a couple of the most compelling aspects. In middle market and mid corporate banking, we're now bringing greater scale in Chicago, Milwaukee, in addition to new capabilities in the Twin Cities and Denver, with expanded coverage and product offerings; we're already gaining traction with early wins, including capital markets and treasury management fees. In Consumer and Business Banking, we're deploying Huntington's capabilities, products and services across the entire customer base following conversion. Combined with our fair play philosophy, this will greatly enhance the customer experience, and as we've demonstrated previously, will accelerate customer acquisition and improve retention. With Huntington's digital and competitive product set, we will deepen our customer relationships. Additionally, we are bringing our award-winning SBA lending platform and growing our wealth and private banking customer base in our newly expanded markets. Our investments are well-timed, as we're seeing continued robust economic recovery in our footprint. Our regions have seen economic activity expand year-to-date faster than the national average, as well as higher labor force participation. We see a unique moment in time to capitalize on these revenue opportunities as our local economies continue to perform very well. We are entering a new era at Huntington with momentum, and we look forward to growth in the years ahead. Zach, over to you to provide more detail on our financial performance.

Thanks Steve, and good morning, everyone. Turning to Slide 6, we reported GAAP earnings per common share of $0.22 for the third quarter, which included acquisition expenses of $234 million. Earnings per common share adjusted for these notable items were $0.35, return on tangible common equity or ROTC came in at 11.5% for the quarter, adjusted for the acquisition-related notable items, ROTC was 17.9%. As we expected and consistent with guidance provided in September, we were pleased to see loan balances ex-PPP grow in the third quarter driven by robust new production. With continued strong liquidity, we're actively managing the balance sheet and have grown the securities portfolio by $3.7 billion from the end of the second quarter. Deposit balances were reduced by $847 million as a result of the branch divestiture. Excluding the divestiture, deposit balances remained relatively stable on a period-end basis. Loans associated with the divestiture totaled $209 million. Fee income was another bright spot where we saw continued momentum in our capital markets, cards and payments, treasury management and wealth and investment businesses. As Steve noted, we've been actively managing our capital, and we're pleased to complete $500 million of share repurchases in the third quarter. We also announced a $0.05 increase to the common stock dividend in the fourth quarter, which takes us to an annualized dividend rate of $0.62 per share. Finally, credit quality continued to improve with net charge-offs of 20 basis points, while nonperforming assets decreased to 12% from the prior quarter. Turning to Slide 7, period-end loan balances totaled $110.6 billion, excluding PPP, loan balances increased by $367 million during the quarter with underlying growth in C&I, Mortgage, Auto and RV Marine portfolios. On the commercial side, while PPP and auto dealer floor plan balances were lower, all other C&I loans increased by net $466 million during the quarter, driven by growth in asset finance and core C&I. We're seeing very encouraging trends from new commercial loan production and pipelines that continue to grow both year-over-year and sequentially. Consumer growth was somewhat offset by marginal pressure from the continued run-off of the home equity portfolio. Additionally, we continue to observe solid activity levels in our consumer portfolios with Residential Mortgage, RV Marine and Automobile, all continuing to post sequential quarter balance growth. Auto saw its strongest third quarter for production activity to date, while mortgage continued to see robust origination activity in the quarter. Excluding PPP, we believe the trough for underlying loan balances is behind us. We expect continued modest growth from these levels in the fourth quarter. With respect to the commercial portfolio specifically, we expect to see momentum accelerate as we move through the fourth quarter and throughout 2022. Moving on to Slide 8, as noted previously, total deposit balances excluding the divestiture were relatively stable. We continue to optimize funding given our strong liquidity levels and reduced higher cost CDs by $395 million. Overall, we continue to see much of the excess liquidity remain fairly sticky as core commercial deposit balances increased during the quarter. Turning to Slide 9, FTE net interest income increased, primarily driven by the full quarter benefit of TCF. Net interest income increased by $323 million, while net interest margin was 2.9%, both driven by the acquired TCF assets. Excess liquidity moderated slightly during the quarter, with $8.1 billion of cash at the Fed at quarter-end. On an average basis for the quarter, excess liquidity represented a drag on the margin of approximately 23 basis points. Core net interest income excluding PPP and accretion was $1,085 million. We expect core net interest income to grow from these levels on an absolute dollar basis in the fourth quarter and throughout 2022. We're positioned to be asset-sensitive today, and we are dynamically managing the balance sheet to become increasingly asset-sensitive to capture the benefit from expected future higher interest rates. This includes the hedge rollouts, as well as the addition of pay-fixed swaps. On June 30, our model net interest income asset sensitivity in an up 100 basis points scenario was 2.9%. Based on the deliberate actions we took during the quarter, we increased our asset sensitivity to 4.0%. We continue to dynamically manage the balance sheet going forward. Over the course of the quarter, we terminated select downside rate protection hedges and added $6 billion of forward pay-fixed swaps. Turning to Slide 10, noninterest income increased, primarily driven by the addition of TCF fee income. Several of our businesses performed quite well in the quarter. Cards and payments benefited from higher customer transaction volumes. Mortgage banking performed well due to higher production and relatively higher saleable spreads, and wealth and investments continue to be driven by positive net asset flows. Capital Markets income also grew driven by solid performance in interest rate derivatives, foreign exchange and syndications. Turning to Slide 11, total noninterest expense came in at approximately $1.3 billion for the quarter, including the $234 million of notable items. Excluding these items, noninterest expense totaled $1.05 billion, primarily driven by the full quarter TCF expenses. Our overall outlook for the magnitude of expense reductions is unchanged from prior guidance. The timing to realize these benefits, however, has accelerated due to our actions to drive realization of cost savings. As a result, we continue to expect that while Q3 was the high watermark for core expenses, they should benefit earlier than we previously thought as they step down into the fourth and first quarters. Core expenses on an absolute dollar basis should trend down throughout 2022. We recognize the benefits of the TCF cost synergies while continuing to invest in initiatives to drive top-line revenue growth. Slide 12 highlights our well-capitalized balance sheet, as well as a few highlights from the recent capital return actions. Common equity Tier 1 ended the quarter at 9.6%, well within our medium-term 9% to 10% operating guidelines. Over the past quarter, we focused on returning capital to our shareholders in alignment with our capital priorities. We executed over half of the $800 million share repurchase program following the authorization, and we were pleased to have recently announced an increase to the common stock dividends. As you can see on Slide 13, our quarter-ending allowance for credit losses represented 1.99% of total loans, down from 2.08% at the prior quarter-end. The improved economic outlook and our stable credit quality resulted in a reserve release of $117 million for the third quarter. Additional key credit quality metrics are shown on Slide 14, further reflecting our improving credit profile, net charge-offs represented an annualized 20 basis points of average loans and leases, among the lowest levels in recent history, well below our target range of 35 to 55 basis points on average through the cycle. Consumer charge-offs remained low in this quarter at seven basis points, with net recoveries in Auto, Home Equity, RV and Marine. Our NPA ratio declined by 12% as the portfolio has continued to perform as expected, and the ACL coverage of NPA increased to 247%. Finally, turning to our outlook on Slide 15. As we operate in a dynamic macro environment, we're focused on managing what we can control. We remain committed to investing in our people-first digitally-powered strategy, driving sustained revenue growth while managing expenses within our long-term commitment to positive operating leverage and achieving a 70% return on tangible common equity. We expect a peer group leading efficiency ratio and a normalized effective tax rate of 18% to 19%. We believe these key metrics, including revenue growth, return on capital, and annual positive operating leverage are a compelling set of financial performance indicators closely aligned with value creation for our shareholders. Now, let me turn it back over to Tim so we can get to your questions.

Thank you, Zack. We will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions, they can add themselves back into the queue. Thank you. Operator, let's open up for questions.

Good morning, guys. Hey, thanks for taking the question. Zack, I was hoping there might be a way to put sort of a finer point on the degree to which you might expect costs to come down in future quarters from this quarter's roughly $1.05 million core basics, of course, you mentioned the acceleration. Just trying to get a sense for sort of the core investment spending minus the cost savings. And then along the lines of acceleration, when do we think that cost savings will be 100% baked into the results?

Yes, thanks, Scott. Great question. Overall, as I noted in my prepared remarks, I'm really pleased with our delivery of the cost synergies and the trajectory. I'm not going to give you specific guidance, but I would say that we do expect sequential reductions each quarter, and for the next couple of quarters for that to be a larger amount, in the double-digit millions is likely the level you could think about. But, in the end, what I'd point you to is the overall expense guidance that I've given, which is net of the cost synergies and the investments that we're making to self-fund those revenue synergy investments. It's generally driving sequential growth throughout the balance of the next five quarters.

Perfect. Thank you. And then maybe switching gears just a bit. I'm pretty constructive on overall lending momentum. I was curious if you could maybe let us know sort of how that translates into aggregate, the sort of an aggregate outlook for ex-PPP loan growth. I think previously you guys have been saying underlying loans kind of flattish through the remainder of the year, and then they grow thereafter. Does the more constructive tone suggest maybe we get a little more growth sooner?

Yes, it's a great question. Let me elaborate a bit more. I think as we talked at the Barclays Investor Conference in September, I noted I expect to see some modest growth between then and the end of Q3, and that's ultimately what we delivered and I'm really pleased with that. I would characterize the growth we're expecting for Q4 to be modest as well. So we do expect growth, likely modest. I think it's really driven by the continuation of the factors we've seen for the last several quarters. We noted a bit in the prepared remarks that is strong calling activity and pipelines driving continued robust production in commercial and quite a bit of momentum in business banking. In the consumer space, we see continued strength in residential mortgage, and auto and RV marine continue to perform pretty well too. The other thing I would say is, now that we have the conversion behind us, we are now able to focus thousands of colleagues on growth. We do expect modest growth as we go into Q4 and then continuing and accelerating throughout the course of next year as well.

Good morning. First wanted to follow up on Zack on the expense question. So we talked about the core in terms of the merger-related or notable items that you called out. When do you think those completely go away? Or does some of that stick around as we think about just the overall expense on that?

Yes, great question, Ebrahim. I think Q4 should remain relatively elevated, similar to the levels we've seen. Overall, taking a step back, our outlook for the merger-related costs was guided back in December at the time of the announcement to $890 million. We continue to expect it to be relatively near that level. So I think the timing of that we've seen more than $500 million at this point through this quarter. We'll see a bit more come in Q4, likely a last bit in Q1, perhaps a tiny bit trailing into Q2, and then by the end of Q2, essentially it should be done.

Got it. And I guess just shifting to the TCF integration sort of nearing an end, Steve, strategically, when you win an acquisitive bank, we are hearing some concerns around just the regulatory stance around deal-making getting tough. Just give us a sense of what your priorities are from capital deployment; is M&A still a piece of the puzzle in terms of how you think about growing the bank?

Ebrahim, we've done two larger bank combinations in 12 years, so I not really think we're like the characterization is apt, but beyond that, as we've said before, our focus is on driving the core performance. We think we have tremendous revenue upside here. We've got Greenfield opportunities for several businesses in Denver, and certainly in the Twin Cities. We've got a scale that we've never had in Chicago. Frankly, we've got density in Michigan that's significant to us. So we're very focused on driving revenue and getting the benefits of that part of the combination equation. We've done a few non-bank things in the past; I'd say more likely over the next years, possibly to do some of that. But our focus, our entire focus is on driving the core.

Thank you. Good morning. Can you remind us how much relative gearing you have to the short versus long end of the curve? And how do you think about performance in an environment where the short end rises perhaps a bit faster than the long end?

Yes, we're most sensitive to the, first of all, thanks for your question, Bill, this is Zack. We are most sensitive to the two to four year range within the yield curve to give you a sense. I think we're going to benefit here as rates move up, irrespective of the steepening but certainly, we would appreciate it if that two to four range continues to move up as it has been doing and as in our continued expectation, and we're positioning to benefit from that, as I noted in some of my prepared remarks, by driving incremental asset sensitivity. To give you a sense that the average duration of our current delta hedging portfolio was one and a half years versus the almost five years for the duration of our pay-fixed swaps. There's a little bit of benefit as we start to rise. I think we're positioned now in the quarter by more than a point of asset sensitivity, as I noted, and we'll look to be dynamic to improve that even as we go forward.

Thanks, Zack, that's super helpful. And following up on that, as you look ahead to higher short rates and better loan growth as utilization rates normalize, how comfortable are you with the rate at which you've been reducing the amount of liquidity that you have parked at the Fed? And then as we look ahead over the next few quarters, I guess, should we expect you to continue to grow the securities portfolio from your, just curious about the extent to which you consider preserving liquidity, through the rest of this year, based on – just based on the outlook?

Yes, that's a terrific question, and certainly something that we watch very, very carefully. I would say, full stop, we feel great about our liquidity levels, and we think we're managing exceptionally well. But the cash at the Fed is a key area that we watch very, very carefully. I would characterize our approach as intentionally incremental, watching the behaviors in our clients and deposit holding activities and seeking to optimize incrementally period by period as more information comes out. As we've guided for a couple of quarters, we expected to add to the securities portfolio, and I think in the last quarter, we mentioned a number $4 billion; we completed that during the third quarter. We'll see where it goes from here. If liquidity trends continue, as we expect, I also expect that we will add some additional securities in the fourth quarter. We're currently at about 22% securities as a percentage of assets, and we'd be comfortable if that rose modestly over time here, given the acceptable returns we're seeing and the fact that it's accretive to NIM versus holding cash. But as you noted, the priority is funding growth. We will take a very incremental approach watching both trends.

Hi, guys. Thanks. Good morning. In terms of the core NIM, I know there's a bit of confusion around why your clients were or weren't. If we did our math right, I think your core NIM just ex-PPP, sorry, the PAA is about 2.81%, which is a fair bit lower than the 2.90%, though that I think we were sort of shooting for. Can you just talk about two, I guess two things. So one, what drove sort of the weaker NIM ex the PAA, but also how do you think about that core NIM on a go-forward basis? Thanks.

Sure. Yes, thanks for the question, Ken. So fully reported NIM came in at 2.90%. And excluding PAA, as you know it was 2.81%. So it was a few basis points lower than we expected; my prior guidance had been just a few basis points lower than 2.90%. It came in ultimately at 2.81%, so a bit lower than that. The two biggest drivers of that were the things we've just talked about in the last question. Elevated Fed cash contributed several basis points of additional drag in the quarter than we had previously expected. We did accelerate the purchase of our securities, which also impacted the mix and drove yields lower generally; spreads were spot on our expectations overall, at a core loan level. I think what I would tell you is going forward, I'm expecting stability from these levels, it will be a function of what happens with the elevated liquidity and Fed cash and the rate environment. Our key focus at this point is trying to drive net interest income dollars, that $1,085 million of net interest income excluding DAA and excluding PPP; given the sequential loan growth that we're projecting, and given that rate stability, my expectation is we're going to grow those dollars into Q4 and grow them throughout 2022.

Got it, okay, perfect. Regarding the 62 branch closures mentioned for the first quarter, that's all included in your expense guidance. I just want to confirm that we shouldn't consider the expense guidance as anything additional. That's just part of the outlook, correct?

You're spot on, Ken. So as Steve noted in his prepared remarks, we'll continue to optimize the network, dynamically manage expenses, ensure that we can invest to capture those really powerful revenue synergies. The guidance I gave on expenses is net of all those things. Ultimately, this is all driving toward achieving our moderate term financial targets that we talked about over time: the 17% return on capital, the revenue growth, accelerating positive operating leverage needed to drive that in the second half of '22.

Hey, good morning, everyone. I wanted to follow up on Scott's initial question on loan growth. In your response, you guys sound pretty bullish on loan momentum, right? Steve, you talked about how much the commercial pipeline is up. Zack, you talked about how momentum is building. Why are you not looking for stronger loan growth here in the fourth quarter?

Steve, a great question. This is Steve. This is a funny quarter because of the holidays interrupting. We'll have very good asset finance origination, but we've had a substantial effort around the conversion. We've had 800 ambassadors out in our different business lines for a couple of weeks. We pulled in at peak production moments a lot of the talents of focus on making sure we got a great conversion, and we think we did. It's harder to do new business between Thanksgiving and year-end, if it's not already in the pipeline. We're talking about another three, three and a half, four weeks max for the pipeline. Now the pipelines are up; as we indicated, they're up year-over-year; they're up quarter-over-quarter sequentially. So that's contributing to the bullishness. It's an odd quarter to be driving it. We're very optimistic about how this will translate into full year '22 as we go forward. We have some great capabilities that have come to us with TCF, and we've already put in place much of the management and a number of the RMs and other revenue producers that we are looking to do in the Twin Cities in Denver, and increasingly in Chicago. So the pieces are coming together very nicely and I have scheduled; that's also contributing to the optimism.

Okay, that's helpful. And, Steve, for my follow-up. We all know Huntington scores really well from a client satisfaction view. Did the brand's consolidations have a notable negative impact on satisfaction levels? And how long do you think it'll take to move TCF below peer client satisfaction up to Huntington's level? Thanks.

The sheer amount of activity has required substantial efforts and resources during the course of the year. We would expect to see a very modest decline in customer satisfaction. Frankly, we could be flat, but we wouldn't expect to see an increase. With respect to the TCF, the new branches from TCF, our colleagues who are new from TCF are embracing fair play and the products that we saw during the conversion. The outstanding efforts with our customers encouraged us, and so we expect it to take maybe a couple of quarters, but it won't take a couple of years to get that customer service level equivalency in those newer branches. We're very pleased; we got a great group of colleagues who have joined us from TCF.

Good morning. I know you've indicated your expectations here for continued positive operating leverage. How do you think about that for '2022? Maybe you can help us with magnitude? I know you're not specifically guiding on the top line or the expense growth expectation, but maybe if you can help us with the magnitude of positive operating leverage on a core basis that you think are reasonable for next year.

Yes, John. Thanks for the question. I think you noted in your question, and I will repeat that I'm not going to give you the specific guidance, but I will try to characterize to answer your question. I think next year's financials are going to be challenging to look at from a year-over-year growth perspective and to some degree to calculate that metric just given the continued two quarters of grow over impact of adding the TCF business. But we do expect full-year positive operating leverage in total. The big focus is driving through the momentum coming into the second half, and certainly exiting the year is on the levels we've targeted for those moderate targets. At that point, we will have a clearer picture to assess year-over-year growth. It won't be dynamic, as we always have been to ensure that we can modulate expenses given revenue trends, while continuing to invest. My expectation is we'll see solid positive operating leverage, but I'm not going to characterize the level specifically at this point.

Okay, all right. That's helpful. And then I guess sort of related question is on the medium-term efficiency goal of 56%. Currently on an adjusted basis, you're 61.2% and curious on how you're thinking about that glide path down to the 56%. What type of timing do you think is reasonable, updated based upon updated trends in the business that you're seeing? When do you think you can hit the 56%? Thanks.

Yes, significantly, we are going to drive toward that. I would note that the efficiency ratio is an outcome, frankly. The most important metrics are revenue growth, return on capital, and positive operating numbers that we're driving to. Efficiency is a key metric, and we are watching it carefully. My expectation at this point is that during the second half of the year, we will see those emerge. We are still doing some of the budgeting to modulate the precision with respect to quarters, but certainly, I think by the second half of the year, the exit run rate of Q4 is my expectation.

Hi, thanks. Good morning. TCF had about a two-plus billion dollar inventory finance portfolio. I'm curious, where is that portfolio today? And then the auto dealer floor plan balances at Huntington, kind of pre-COVID versus today. What I'm getting at is what's the upside of the balance sheet when inventories in both those portfolios hypothetically normalize?

Yes, as we've talked about a bit over time. Interestingly, each of the three major kinds of line businesses that we've got auto, inventory, and general motor market each of them represented roughly $2 billion opportunities when those utilization rates return to normal pre-COVID levels. That sort of gives you an order of magnitude; the trends we're seeing at this point in auto, we're down a couple more percentage points, two to three to be precise between the end of Q2 and the end of Q3 to 25%. I'm seeing relative stability in the auto floor plan business to some degree; some of the chip issues and other supply chain issues produce some incremental pressure. We're also getting some defined and new commitments and some term debt into those businesses such that my expectation is relatively flat in that space. Inventory finance has similar opportunities. We're creating some very known planned uses of those lines, so I expect stability, perhaps even a modest uptick actually into Q4. The general rental market should continue to be flat here for the time being; however, I am going to answer your question, but I would pull back. A second, I would highlight that it's our planning expectation at this point that the totality of these lines will be relatively flat throughout the course of '22. There could well be an opportunity to get there, but for planning purposes, we're trying to zero that out. We still expect pretty good loan growth, and I think that's pointing back to the robust new production activity that we're seeing.

Thank you. And then as a follow-up, the $140 million of service charges on the TCF part, were the fee adjustments made right after the conversion? I remember there were some revisions that were going to be made that would result in lower fees. I'm looking at that run rate and asking if that's sustainable going forward.

Yes, it's a great question. Upon conversion, which we completed over the Columbus Day weekend, all the TCF customers are now on to the Huntington products, the platform and all our fair play product dynamics. We expect to see a modestly lower trajectory for that line into Q4. Overall, over the longer term, we feel great about the conversion to the fair play business, as we've talked about a lot. This is a play we have run many times, and we're very confident in the returns that are generated. Typically, the dynamic is a higher degree of fee, income reduction in the early periods, offset over time by incremental deepening and incremental acquisition in the market from those products; generally about an 18-month payback. That’s sort of the dynamic we're expecting to see a bit lower into Q4 and then climb back over that roughly a year-and-a-half period.

Hey, thanks. Good morning. Just back on the loan growth topic you highlighted the late stage, middle market up 36%. Just curious what you think is behind that and how much things have changed over the last couple of quarters. And then, Steve or Rich, any feedback on the supply chain loosening up from your borrowers?

Jon, I'll start this; this is Steve, Rich and Zack may choose to add. The supply chain issues continue to be a challenge; you're seeing some OEMs ship and deliver without chips. Even some of the autos are doing that. We've got auto dealers with no new inventory allot. It's shocking to illustrate the challenges here. As I think you saw with the Ford and GM earnings announcements, expectations are going to deepen in the next year before it gets normalized. That's why Zack's earlier comment is we're not counting on utilization normalization in inventory finance or auto to be a tailwind next year. If it happens, that's great. We do see supply chain issues getting resolved or getting to a resolution over time. I expect that to continue through next year, maybe even a little bit beyond depending on the industry. But there's a lot of activity and capability fueling additional manufacturing with adjacency in North America, including in the footprint states that we're in. So we like how this sets up over time in terms of additional opportunity for us, and we're bullish, but we clearly have both a supply chain and a labor issue in virtually every business that's out there today.

Hi, Steve, this is Rich. To piggyback on that, I think as it relates to middle market low demand, we're seeing both increased CapEx given the labor issues and a bigger push to automate production to garner productivity that will offset some of the labor issues. The other thing we're seeing is just a heightened level of M&A. As we're coming out of the COVID fog with respect to EBITDA levels and things, there's a greater sense of certainty around cash flows. Buyers are aggressively looking to expand if they can, and sellers, I think some of them have just gotten a little tired of going through a COVID environment, and when their cash flows are picking back up, they may want to sell. We're seeing increased M&A in the middle market space as well. There's also a dynamic in the Twin Cities and Denver; TCF did not have their market banking. There were a series of things they didn't do. So these are Greenfield every customer's net new. That's the teams are in place; as earlier mentioned, and we'll build them out further. We've got four in place, we're seeing success, and that's translating into additional cross-sell revenue as well; that's contributing to this optimism.

I'm guessing SBA falls in that as well. Is that fair?

Yes, it does.

Okay and then can you just touch on your repurchase appetite from here?

Yes, this is Zack. I'll take that one, Jon. I think we're being pretty dynamic on it. We had a very intentional plan going into the third quarter, as we noted in the July call to accelerate and front load. We felt great about the $500 million; I think we're going to likely continue to be somewhat front-loaded, with a balance of that here in Q4 and as we go into Q1, but still working through it. Looking to be dynamic as we do that.

Thanks. Good morning. Zack, I was just wondering, in the third quarter, did you have some gross savings in there? Or can you tell us what they were? I know you're only kind of telling us we're going to decline from here, but just wondering what you might have already captured?

Yes, I would say they were quite modest in the third quarter. The cost savings came largely from branch rationalization, employee level reductions, technology synergies importing the TCF business essentially onto the Huntington tech stack, and a long tail of other savings, including vendor and sourcing-related opportunities that come with increased scale. For the most part, most of those were beginning to be executed on during the third quarter, with effect more into the fourth. As we go into the first quarter, the decisions around them and the planning and actions necessary to achieve them have essentially all been completed. Now we are in the execution mode of just realizing them. So not much, I guess is the long-winded answer in the third quarter, more substantively in the fourth, which is partially why we're talking about a larger step down in the fourth quarter than we thought before. As we go into the first quarter, a similar level of step down is my current expectation, then a bit of a more asymptotic function, as you get into Q3 and Q4; but still stepping down.

And a follow up on that. Do you have any change to your view of the original $490 million in total that you expect? I know you're telling us maybe we'll see a little bit more of a pull forward from a timing perspective. But what about the absolute amount?

No, the absolute amount is solid at that level. We're slightly above that, within rounding errors. So nothing major to highlight. I indicated that $490 million is the target that Huntington would achieve.

Okay. And last cleanup one, just PPP in the deck, you show that you have $54 million of the fees left. How do you expect the NII related to PPP to trajectory from here fourth quarter and beyond on the 40 something?

It's kind of like a half-life function; I would tell you over the next three quarters, we're expecting roughly 50% of the PPP to reduce into the fourth quarter, and then roughly 50% of that reducing into the first and then yet again into the second. These are planning assumptions I've given you; you should note that it's pretty dynamic. The SBA to their credit has been accelerating forgiveness quite substantively recently, so these numbers move around from a planning perspective. That's essentially the kind of outlook function that we've got.

Good morning, everyone. Just wanted to drill down on the service charge and deposits here and a good quarter for my think expectations. And when, Steve, when you look at the press headlines that it gets talked about a lot, that there's going to be some restrictions on overdraft, and just curious how you're thinking about that, and how that may impact your fees going forward? Secondly, when I think of the overdraft side of things, fair play banking is something that you guys have. I think your overdraft fees would be a smaller portion of revenue to peers, but yet you're screened a little bit higher there. Just curious as to why you think that may be the case as well. Thanks.

David, great questions. We put 24-hour notice more than a decade ago, and that continues to this day. We opened it up last year for small business, and we're continuously doing certain things to help our customers stand by cash, is a classic example of that. There's no limit to the use of those funds with our customers. We put up a minimum of $50 in last year for an overdraft, and we call that safety zone. So we've been continuously working to benefit our customers as part of this fair play banking philosophy. We tend to be strong on a relative basis in terms of customer acquisition as a constant quench of the different features and functions on our checking products. That's ameliorated both the revenue give up over the last decade or so, very substantially. As Zack pointed out, there will be a bit of a step down in the fourth quarter and for a couple of quarters thereafter for the TCF customers, but they're going to get the same advantage of products and services that all of our previously existing customers have as well. It will accompany our expectation around both customer retention and customer acquisition. It's hard for me to speculate unlike regulators. We've been trying to do things to help consumers and businesses for quite some time, not just with overdraft fees, but other types of fee elimination reductions. We put a new alert system in that regard, a year and a half ago. So there are a lot of tools available to help customers manage their money and budget, etc., and avoid overdraft fees.

Thank you for joining us today. We've completed the majority of the actions leading to achievement of TCF cost synergies and expect to achieve all of the planned reductions. We're coming off the diversion with significant momentum across the bank, and I'm confident that our disciplined execution will create substantial value for our shareholders. We have a deeply embedded stock ownership mentality, which aligns the interests of our board, management, and colleagues, with our shareholders. We appreciate your support and interest in Huntington. Have a great day.